Wine makers feel the squeeze

January 28 2003

Wine groups are facing their own grapes of wrath, with an oversupply of wine and lower retail margins biting into earnings. Rod Myer reports.

Last week's announcements by Southcorp and Peter Lehmann Wines that life was not as easy in the wine game as they had earlier hoped has focused attention on the malaise in an industry where until recently a boom was the norm.

A combination of pressure on producers by dominant retailers and oversupply in many wine varieties has seen margins squeezed throughout the industry.

Southcorp shareholders have been told they can expect a full-year result not much better than last year's, or 15 per cent below earlier projections. Peter Lehmann's half-year results will be 12 per cent below expectations. Southcorp had a profit slide of 20 to 25 per cent in Australia, and 30 to 40 per cent in its UK business.

What the two listed wine makers is experiencing is also going down through the rest of the industry for several reasons.

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Wine consultant Roy Moorfield says the present glut has been "mooted for a while. There are compound stresses out there; no one is saying different." At the moment, only chardonnay grapes are still experiencing demand stronger than supply, he says.

So big is the surplus of grapes that last year's reduced harvest caused by an unseasonally cold summer did not bring the market back into balance.

Also hurting the wine industry has been the rising market power of the big retailers, which have been squeezing margins and, say some wine makers, demanding various kinds of recompense for shelf space.

Consumers have been feeling the benefits of what is hitting the industry so hard. Bert Werden, proprietor of Strathmore Cellars, says the margin squeeze has been evident in all sectors of the market, with premium wines under pressure where they have been overpriced in the past.

He cites two Southcorp brands, John Riddoch and Michael Shiraz, that previously retailed at $90 a bottle and have since come back to $55, where they find good demand.

Wine makers have also brought in new brands at price points below existing labels, he says, which helps them survive in an industry experiencing price pressure for the first time in several years.

Rowan Block, general manager of Mitchelton Wines, now owned by brewer Lion Nathan, says that in the category of $15 a bottle and below, prices have come down as much as 25 to 30 per cent.

"You can now get a bottle of wine that was $15 12 months ago for $11, and if it's on Christmas special you might get it for $10," he said.

Doug Lehmann, chief executive of Peter Lehmann Wines, says the local market was good until recently but retailers are now demanding and getting deals on margin reduction from producers.

Some observers believe these deals can include payments to the retailer for stocking, or commitments to in-store wine tastings and the provision of free merchandise such as labelled glasses.

The power of big retailers Coles Myer and Woolworths has become increasingly important to Southcorp, Australia's biggest wine producer. Sales through Coles Myer and Woolworths account for 42 per cent of Southcorp's annual sales compared with 30 per cent a couple of years ago.

And there is room for the influence of Coles Myer and Woolworths to expand as they account for about 30 per cent of total wine sales compared with more than 70 per cent in packaged groceries.

In the UK, which has been a happy hunting ground for Australian wine producers for some years, the power of the big retailers is even greater.

Mitchelton's Rowan Block says retailers there typically sit down with wine producers, work out their production costs, and allocate a margin for both the retailer and the wine maker, pressuring profitability even further.